Plain talk…
…for better manufacturer/sales organization relationships

  The only way to plant the seeds of a solid relationship between manufacturer and specialty sales and marketing organization is through plain talk. And it has to begin before a contract is signed. The following was written by IMDA President Dave Campbell of Vital/Med Systems to present to manufacturers seeking to do business with IMDA members. Both manufacturers and specialty distributors/reps should pay attention.

  You’ve made the decision that outsourcing sales and marketing for your product or product line is the most cost-effective choice for your company. Now, how do you initiate a relationship with an independent sales and marketing partner that will survive the test of time and be profitable for both parties?
  IMDA members are approached often by manufacturers seeking our services as specialty medical device sales professionals. This writing is an attempt to share some thoughts on how we choose an attractive opportunity, and what we look for in new marketing relationships.
  A typical Selling Agreement contains provisions that address the following points, but legal language is easily misunderstood. Perhaps a little plain talk can help!
  Following are the key points that specialty sales and marketing organizations look for when evaluating an opportunity to sell and market a manufacturer’s product(s):

• A product or products that fit with others we sell, using our existing network of clinical contacts.
• Proprietary products (patented or patent pending) that provide well-differentiated sales features.
• Product(s) that increase patient benefit while lowering or maintaining current costs. Cost is not the same as unit price. Today, concept-selling new technologies usually involves a cost analysis that demonstrates economic value as well as clinical value. We generally rely on our manufacturers to provide such cost analyses.
• A real, working reimbursement strategy for the technology.
• A contract of sufficient duration (at least three years) to permit a) initial market exploration and development, b) product initiation in light of today’s national contract scene, c) working the sales cycle through issues such as standardization and new product committees. The initial term needs to be at least three years to permit all of the above things to occur.
• Geographic and/or market exclusivity. Our professional sales personnel work a marketplace only if we have the manufacturer’s guarantee of future business if our sales efforts prove successful.
• A manufacturer who is prepared to hire and train at least a few field representatives to provide ongoing support, training and consultation to a regional group of independent dealers. Our most successful product lines have all had this element, and we have identified it as a crucial feature of a long and successful partnership.
• A manufacturer who has developed its own business model sufficiently so that it has in place a core group of management personnel, customer service staff, and at least a skeleton R&D program to fill the future pipeline with new offerings.

Key issues

  When negotiating an acceptable Specialty Dealer or Representative Selling Agreement, the following are key issues that help guarantee a long-term successful relationship:

• Contract Term
• Sales Quota
• Inventory Management
• Indemnification
• Termination Without Cause
• National Contracts
• Employee Protection
• Confidentiality and Proprietary Information
• Assignment
• Arbitration and Conflict Resolution

  Contract Term: As mentioned previously, three years is the minimum acceptable term. In reality, we are thinking much longer term than this. IMDA members hope to build their business around serious long-term partnerships with manufacturers. Why a minimum of three years? Because our investment in time and resources in Year 1 usually precludes any profit. Market development and conceptual selling take a disproportionate toll. In Year 2, we hopefully do more than break-even. Year 3 is often the first seriously profitable year.
  Sales Quota: A quota must take into consideration the specific demographics of the territory at issue. For example:

• Some IMDA members’ territories are very small.
• Physicians in some areas of the country are not as aggressive in adopting new technologies as those in other areas of the country.
• Many accounts in our members’ territories have few than 100 beds, and the number of hospitals – particularly in rural or mountain areas – can be small.

  A quota based upon real demographic potential and performance measures, defined with demographics in mind, is essential. Quotas should be based upon market penetration and/or rate of growth, not solely dollar sales. Failure to meet a properly set quota should always be justification for potential dealer termination "for cause." But again, fair and proper quota-setting is key.
  Inventory Management: The specialty dealer's or rep’s primary mechanism for profit generation is asset management. Accounts Receivable and Inventory are the two largest asset items on our balance sheet. Any mechanism that restricts the rep’s or dealer’s ability to properly manage the inventory asset is a direct blow to our ability to generate profits. Our goal as a specialty distributor is to achieve a fulfillment rate of at least 95% of ordered items, shipped the day of the order or the following business day.
  Indemnification: Each party to the relationship needs proper indemnification. Where the business actions and activities of one party could bring legal risk exposure to the other, especially in those cases where the potentially harmed party has no control over the acts and behavior of the other, appropriate indemnification needs to be declared and put in place. The dealer does not participate in or control the product design, manufacture, or original packaging, and therefore should not be expected to provide “product liability” insurance. Our insurer of business liability requires the dealer to be added under Vendor Coverage on the manufacturer’s policy. This is the case with every manufacturer we represent and is well accepted in the industry. Likewise, the manufacturer needs to be indemnified by the dealer where the acts or actions of the dealer might place the manufacturer at risk.
  Termination Without Cause: Well-formed agreements contain exit provisions allowing either party to opt out of the agreement, on sufficient notice, if their business model or commercial needs should change. The goal should be to protect the well-being of one party through a process that is not unreasonably damaging to the business interests of the other. No one can predict future business issues. If the distributor or rep decides to migrate to a new area of specialization and as a result wishes to exit a specialty in which the manufacturer’s product is sold, then the distributor or rep should assist in transferring the established business to a replacement party. If the manufacturer should sell the company or product line, or the manufacturer envisions a change in its marketing model, and the line has been successful for the parties, the distributor/rep stands to be harmed, perhaps significantly, by the loss of business. Some form of exit plan that cushions the impact on the distributor or rep should be designed.
  National Contracts: GPO contracts, GSA agreements, and other forms of national or regional contracts can cause serious harm to the relationship if agreement is not set in place beforehand. The model that has been working well in the industry calls for a sharing of the discount between the parties with a floor on reduced profits for the independent that frames the issue.
  Employee Protection: Both parties have invested significantly in their personnel and staff. The agreement should guarantee the security of each party's employees from unethical harvesting at the hands of the other.
  Confidentiality and Proprietary Information: Both parties have identifiable intellectual property and information, which should be safeguarded and protected from unwarranted disclosure and release without authorization.
  Assignment: A simple provision should be included for the specialty distributor or rep to assign ownership of the company and its contractual relationships upon a sale or other change of control. The manufacturer should retain the right to review and accept or decline such an assignment, which should not be unreasonably withheld.
  Arbitration and Conflict Resolution: Although formal conflict resolution is seldom called for, an adequate process should be designed in advance to assist if it is needed. In many cases, an arbitration process is preferred to outright litigation. The aggrieved party should not be unduly inconvenienced in resolving its issue. Therefore, we suggest that the site for arbitration or other conflict resolution be the choice of the aggrieved party, but only a choice from between the legal locations of the parties themselves. Thus, each has a choice of its own domestic location or the other party’s site, whichever they prefer at the time of an issue.

  Many other issues could be covered in an agreement between a manufacturer and an independent specialty distributor or representative. However, we believe that if the above points are properly considered and drafted into the agreement, both parties will avoid many pitfalls and enjoy a long and profitable relationship.

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• Filter out the noise in your business.

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